FDI in Retail – Why it could prove a threat to local retailers?

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There’s so much buzz about the recent cabinet decision to allow 51% FDI in Multi-Brand retail ; parties are threatening to split from the government, oppositions calling for a national bandh; while the cabinet justifying its decision to stay put with FDI citing it as an economic reform! But will this inflow of MNCs and Retail Giants create that expected value and contribute to the economy and its people – let’s find out. Let us look at some of the challenges it may pose to the local retail industry.

Currently only about 7-8% of the Indian Retail Industry is under the organized banner. Now this is a risk as well as an opportunity. Many fear that with the global retailers coming in, this would marginalize the small time local retailer and result in unemployment. This has been the case in come South East Asia countries.

Another risk to the existing retail industry would be that, global retailer, with their deep pockets and financial clout could easily lower prices which may wipe out local retailers and once this happens can gain monopoly in the market. Moreover, borrowing rates internationally are quite lower than India; in such a scenario, local retailers may find it expensive and difficult to borrow for expansion purposes.

On the macro-economic point of view as well, foreign retailers may prefer sourcing their products from abroad and importing them into India- this may not only upset the local production, but also disturb the import-export balance. And with the power to source from anywhere in the world, the bargaining power lies in the hands of these retailers and not he suppliers, again posing a challenge for the suppliers from the country.

These were some of the major areas where foreign retailers could affect the local retailer system. But as they say there’s always the silver lining which people fail to see , FDI in retail will bring out many positive changes to the system as well, which I will try to address in my next article.

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